Wal-Mart: Sell This Retail Giant

Jun. 7.12 | About: Wal-Mart Stores, (WMT)

By Palwasha Saaim

Wal-Mart (NYSE: WMT) closed at $65.99 on Monday, slightly below its 52 week high of $66.66 and the $66-$67 12 month intrinsic value estimated by the S&P. With WMT trading around its fair value, the ongoing corruption lawsuit and the shareholders' trust deficit for the present Wal-Mart executives as evident from the recent annual shareholders' meeting, I believe that now may be the best time for short term investors to sell/short the stock and reap the rewards.

Wal-Mart is the largest retailer in the world and it is the largest corporation in the world when ranked by revenue. Wal-Mart has a history of positive FCF, increasing dividend payouts and on and off share buybacks. What lends to its success is the stock's defensive nature, helping it to perform equally well under both up and down markets. Its ROE hovers around 23.5%, EPS is 4.54 and forward dividend yield is 2.4%, all of which are the highest among its peers (COST, TGT, DG, M, PSMT). Wal-Mart is certainly good for those looking for a dividend income that beats inflation. But can it bring capital gains, at least in the near term?

Despite the apparent good prospects, Wal-Mart owes its success to its defensive position in the industry and its aggressive pricing. Wal-Mart pursues ELDP (Every Day Low Prices) in order to surpass sales volumes of its competitors-which has affected its sales growth. What is equally challenging is that the company outsources inventory and imports from China. The deteriorating dollar against the yuan over the past five months, weakening consumer purchasing power and hiking energy prices in the US pose yet another threat to Q2 sales. Wal-Mart International's revenues are also expected to suffer because of the overall weakening dollar.

The company's competitors like Costco and Target saw their sales falling short of their projected levels. Costco missed Wall Street analysts' 5.1% sales increase estimate and Target missed its 2.8% sales increase estimate. Wal-Mart's Q2 growth is expected to be around 8.2% against the industry average of 42.7%. In fact, all its peers are expected to have a higher growth rate. Costco (NASDAQ:COST) is expected to grow at 13.7%, Dollar General (NYSE:DG) is expected to grow at 18%, and PriceSmart (NASDAQ:PSMT) is projected to grow at a 42.9% rate. The only exception is Target (NYSE:TGT) which is expected to decline by 7.3%.

Wal-Mart's PEG ratio is 1.62, way above the industry and sector average of 0.86 and 0.95, respectively. Wal-Mart's average P/E of 13.44 is greater than its industry's average of 12.31 and sector average of 12.22. Both of these parameters indicate a relative overvaluation of the company to the industry and its respective sector.

Wal-Mart historically grew its square footage by at least 8% annually. According to its annual report, Wal-Mart International will add between 30 and 33 million sqft. of retail space in FY 13. Wal-Mart is eyeing Ethiopia as the next target market and Pakistan may be on that list too. Whether these countries with high poverty rates and weaker consumer purchasing power prove to be good candidates remains a question. If future expansions come through acquisitions, Wal-Mart shareholders can expect a decline in their holding's value.

An addition to the many lawsuits Wal-Mart is facing is the recent lawsuit by a Californian fund that charged Wal-Mart of bribing to increase its market share in Mexico. Shareholders have shown resentment towards the board in the Annual Shareholder's Meeting this month when 31% of the independent investor votes went against CEO Lee Scott and more than 25% independent investor votes went against Rob Walton, the founder's son. If Wal-Mart follows this 'by hook or by crook' policy for future expansions, it will tarnish the company's image for good.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.